Wearables Model Supports Case for Years of Rapid Growth

We’re updating our Apple Wearables, Home, and Accessories model. This category includes two signature products, Apple Watch and AirPods. While Apple does not report details on those segments, the company has made 24 unique comments since Dec. 2014 related to trends in the category, typically in regards to growth rates and trailing revenue.

2019 Takeaways

Growth accelerating. While Apple does not report a wearables number, we now believe the segment’s growth accelerated for the 4th consecutive quarter in Sep-19 to 65%, compared to Jun-19 at 60%, Mar-19 at 48% and Dec-18 at 32%. Previously we expected Sep-19 growth of 39%.

AirPods more than doubles. We now expect AirPod units in CY19 of 59.9m, up 110% over CY18. Previously we had modeled 50m units up 75%.

Rolling out 2020 Wearables Estimates

Wearables bigger than Mac. We now expect wearables to account for 11% of revenue in CY20, up from 8% in CY19, slightly exceeding Mac revenue at 10% of total next year. Our model suggests wearables growth of 45% next year down from 58% in CY19.

AirPods. We expect CY20 AirPod unit growth of 60% with 95.8m units, down from 110% growth with 59.9m units in CY19. Revenue growth of 80% is faster than unit growth (due to higher-priced AirPods Pro), compared to 131% in CY19.

Watch. We expect CY20 Watch unit growth of 30% with 36.8m units, up from 28% growth with 28.4m units in CY19. The acceleration in unit growth is attributed to the Sep-19 price reduction of Series 3 to $199. Revenue growth of 21%, is down from 30% in CY19.

Beyond 2020, Watch has Significant Room to Grow

Overall Watch adoption remains nascent, which we believe supports 20-30% unit growth for the next five years. We estimate at end of Sep-19, 8% of iPhone owners used a Watch (based on a 3 year expected life). Long-term, we believe the attach rate could reach 40%, which implies about 125m units a year (compared to our 36.8m estimate for Cy20). This implies in 2025 about 12% of Apple’s overall revenue will be Watch (assumes $48B in $385B in overall revenue in 2025).